Texas snapshot: A look at development, performance trends with STR

TEXAS – Hotel Investment Today gathered some intelligence from STR and asked its Vice President of Analytics Isaac Collazo about what the industry can expect from markets such as Dallas, Austin, Houston and San Antonio in the months ahead.

Hotel Investment Today (HIT):Just how hot is Texas in terms of overall hotel development numbers and, in comparison with other states, how much of this has been fueled by lower land and construction costs and a business-friendly climate?

Isaac Collazo (IC): Cheap land and construction likely does not drive hotel development as that doesn’t ensure performance. Solid demand and demand drivers are what drives hotel development and Texas is doing well.

In 1Q 2023, room demand in the state was 5.9% higher than in the same quarter of 2019. The state has been outperforming the pre-pandemic benchmark in five of the past six quarters with 1Q22 the exception likely due to Omicron.

In 1Q 2023, supply was up 7% versus 1Q 2019, which is among the highest in the nation.

The supply pipeline (under construction, final planning and planning) of the state is the largest in terms of hotels but second largest in terms of rooms, behind California.

Dallas has the most hotels and rooms in the pipeline of any market in the nation with Atlanta not far behind.

Texas occupies two spots (Dallas and Houston) of the 10 markets with the largest number of rooms in the pipeline. Austin has the 11th highest number of rooms in the pipeline.

Texas pipeline data

Market               Phase                     Properties          Rooms                                  
Texas                  In construction        120                    15,119
Texas                  Planning                  315                   33,190
Texas                  Final Planning          318                    32,585

Austin                 In construction          20                      2,508
Austin                 Planning                    44                     5,103
Austin                 Final Planning            37                     4,112

Dallas                  In construction         28                      3,672
Dallas                  Planning                  69                       7,769
Dallas                  Final Planning          72                       7,859

Houston              In construction          22                       2,780
Houston              Planning                   42                       4,390
Houston              Final Planning           45                       4,389

San Antonio        In construction          3                            266
San Antonio        Planning                  19                         2,002
San Antonio        Final Planning          22                         2,515
Source: STR data as of May 11, 2023

HIT: Where in Texas and in what sectors are we seeing the biggest increases in hotel development, as well as M&A?

IC: Fully, 53% of the rooms under development in the state are in Dallas, Houston and Austin with Dallas accounting for nearly a quarter of all development within the state.

HIT: How much lower are overall project costs for luxury, upscale, select service and extended-stay? Which brands have the biggest pipelines so far?

IC: Fully, 61% of the rooms in the Texas pipeline are Upper Midscale and Upscale, similar to the rest of the country.

Both chain scales are led by extended-stay products: Home2 Suites in Upper Midscale and Residence Inn in Upscale. The former has the largest room pipeline of any brand within the state followed by Holiday Inn Express.

HIT: Is the Four Seasons near Austin a bellwether for what’s to come?

IC: We continue to see investment in the high end of the market. It’s not new.

HIT: What are the red flags?

IC: Rising interest rates will likely hold back development in the short-term. This is evidenced by a slowing in under construction since its peak in 3Q 2020.

A recession larger than what is expected. At present, the recession, due to Fed policy, is predicted to be mild with limited impact to employment.

HIT: How will the bid-ask rate trend?

IC: Market sales price by room, according to CoStar, has been rising but is expected to level off in the immediate future before increasing again.

Texas performance data

Date                   Occupancy       ADR              RevPAR
March ‘19            63.63                $106.58         $67.82
March ’22            59.23                $107.51         $63.68
March ’23            62.99                $118.45         $74.62
Source: STR

HIT: What’s the growth forecast for hotels?

IC: STR expects the industry will see continued RevPAR growth, the broadest measure of profitability, in 2023 and 2024 despite a slowing economy.

Demand is expected to remain robust achieving record levels by the end of the year and reaching up further in 2024 and 2025.

HIT: What’s the near-term focus for rate, occupancy and ADR growth both for the state and, in comparison, with other top markets?

IC: Demand in the state has been robust and better than the national average. In 1Q 2019, Texas accounted for 9% of all demand nationwide. In 1Q 2023, the percentage was 10%.

Of the 10 largest states, in terms of supply, Texas was closer to its 1Q 2019 occupancy level than others despite having among the largest supply gains.

ADR growth has also been robust, but less so than the national average. Mix of hotels is likely the result of the difference.